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Grubhub's Growth Hits a Brick Wall as Its Expenses Soar

Shares of Grubhub Inc(NYSE: GRUB) went on a wild ride after the company released its fourth-quarter report Thursday. The stock initially plunged about 20% after it missed estimates on the top and bottom lines, but pared nearly all those losses with a 2% dip by the end of the day.

Grubhub's revenue rose 40% annually to $287.7 million during the quarter, but missed estimates by $2.3 million. Its adjusted EBITDA fell 26% to $42.1 million, missing expectations by $5.1 million.

A businessman watches a stock chart crash through the floor.

Image source: Getty Images.

Grubhub's non-GAAP net income declined 47% to $17.6 million, or $0.19 per share, which also missed expectations by nine cents. On a GAAP basis it posted a net loss of $5.2 million, compared to a profit of $53.5 million a year earlier.

Grubhub expects its revenue to rise 31% to 42% in 2019, which matches Wall Street's expectations. However, it expects its adjusted EBITDA to rise just 1% to 13%, compared to a consensus forecast for 29% growth. These bleak numbers indicate that the online food delivery company is experiencing serious growing pains.

The key numbers

Grubhub, which owns the largest network of food delivery services in America, has been considered a great growth stock. However, its growth in Daily Average Grubs, Gross Food Sales, Active Diners, and revenue all decelerated during the fourth quarter.

That slowdown was caused by two things. First, Grubhub lapped its acquisitions of Yelp's (NYSE: YELP) Eat24, Foodler, and OrderUp, which closed in the second half of 2017 and boosted its growth throughout the year.

Grubhub's top-line growth still looks impressive, but its total costs and expenses surged 62% annually to $290.5 million (101% of its revenue) during the quarter and caused its bottom-line growth to crumble.

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

GAAP net income

293%

74%

104%

75%

(110%)

Non-GAAP net income

68%

88%

99%

72%

(47%)

Adjusted EBITDA

45%

51%

61%

41%

(26%)

YOY growth. Source: GrubHub quarterly reports.

Those declines weren't surprising, since Grubhub previously warned that it would need to spend more cash on acquisitions, marketing, logistics, and partnerships over the next few quarters.

Those investments could help Grubhub maintain its lead, but its expenses could keep rising as rivals adopt more aggressive loss-leading strategies. Uber and Postmates both recently filed for IPOs, and that fresh cash could help them gain more ground against Grubhub.

Grubhub's mobile app.

Image source: Grubhub.

Can Grubhub retain its lead?

Grubhub can maintain its lead with several strategies. It could expand its digital ecosystem with additional services, like LevelUp's payment and loyalty services, which lock in restaurants and generate more revenue per customer. This strategy is similar to Square's Square for Restaurants platform, which integrates Caviar with its payment, analytics, and enterprise services.

Grubhub could also secure more partnerships with big restaurant chains. It partnered with Yum Brands(NYSE: YUM) last year to offer online pickup and delivery services from select KFC and Taco Bell restaurants, and it recently launched Taco Bell delivery services nationwide.

Lastly, Grubhub could acquire other small food delivery services. Its business was built on a long list of acquisitions, which includes Seamless, MenuPages, Allmenus, DiningIn, Delivered Dish, LAbite, Eat24, and Tapingo. If push comes to shove, Grubhub could gobble up other smaller rivals to maintain its superior scale and brand recognition.

Do the rewards outweigh the risks?

Grubhub stock lost nearly 40% of its value over the past six months and trades at an all-time low of about 5 times expected 2019 sales. Its adjusted EBITDA guidance for the year also indicates that its earnings declines should bottom out soon.

However, I'm reluctant to average down on my current position in Grubhub. It faces too many near-term headwinds, and its efforts to fend off the competition while expanding its ecosystem will dent its earnings growth. I don't plan to sell my shares anytime soon, but I won't buy any more until I see meaningful signs of improvement.